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Monitor
PUBLISHED : Tuesday, 16 October, 2012, 12:00am
UPDATED : Tuesday, 16 October, 2012, 5:29am

'Strange and worrying' that Hong Kong government doesn't get it

For any confused officials, here's a quick rundown on the critical factors propelling the city's residential property prices up into the stratosphere

The weekend's Sunday Morning Post carried a strange and worrying news article.

It described Anthony Cheung Bing-leung's struggle to understand Hong Kong's property prices.

The market, he said, was in a "strange and worrying" state.

"Property prices are rising consistently, while our economic performance remains fragile," he lamented, evidently confused by what he clearly thinks is a wholly unreasonable divergence between market dynamics and underlying economics.

Considering that Cheung is the government's secretary for transport and housing, this is troubling indeed.

Surely it's not too much to expect that the housing secretary should have a solid grasp on what's driving the city's residential property market?

Evidently it is.

So, for all those government officials confounded by the market's buoyancy, here's a brief primer on why Hong Kong home prices continue to hit new records (see the first chart).

Firstly, we have interest rates. I promise not to bang on about rates too much, because both this column and Jake van der Kamp have covered the subject ad nauseam.

But it's worth saying again that with interbank rates at 0.4 per cent, homebuyers can get a mortgage at an interest rate of just 3 per cent.

And with the Federal Reserve promising to keep interest rates effectively at zero for another three years, buyers can feel confident their payments aren't going to rise much over the medium term.

As a result, although Hong Kong's median home price is now almost 13 times the city's median household income, provided you've got enough cash for the deposit buying an apartment is actually quite cheap.

According to property agency Centaline, the cost of servicing a mortgage on a typical Hong Kong flat currently amounts to 45 per cent of median household income.

That might sound steep to you or me, but it's actually below the long-term average cost, which stands at 48 per cent.

This brings us on to the second reason property prices are so high. That mortgage service cost figure of 45 per cent of monthly income figure is deeply misleading.

That's because it is based on median household income. But as the front page splash in yesterday's South China Morning Post made clear, Hong Kong has become a much more unequal place over recent years. As a result, median income is no longer such a great guide to buying power.

Not only have the rich got richer, but thanks to a relative hollowing out among middle-income earners, there are more of them.

And for the property-buying classes - reckoned to be those with a monthly household income of HK$40,000 or above - the cost of servicing a mortgage is considerably less than 45 per cent of their earnings. For many buyers, it's more like 20 per cent - a far more affordable figure.

Of course, they still need to make the down payment; a daunting 30 per cent of the property's value. But given that 60 per cent of Hong Kong's privately owned homes are now mortgage-free, in many cases Mum and Dad, with no payments of their own to make, have little problem stumping up the cash.

And finally there is the government's own role to consider.

By restricting its land supply in recent years (see the second chart), the government has helped push primary market prices sharply higher.

This is not only due to the standard supply/demand dynamic that you would expect. There is also a more subtle force at work.

In the days when land sales were plentiful, developers relied on high volumes of sales to generate their profits. But with the land supply squeezed, they naturally concentrated on making greater margins from lower volumes, which meant building "luxury" flats they could sell at much higher prices.

In recent years the combination of these factors has driven home prices sharply higher, and in the near term it will continue to support them at stratospheric levels.

The strangest and most worrying thing about it is that the government doesn't seem to understand what's going on.

tom.holland@scmp.com

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SpeakFreely
Why would government want to reduce the property price at all as this is a major source of its income for years?
rebmonk
Anthony Cheung would benefit from reading this excellent article!
The message is loud and clear: the Government needs to drastcally increase the land supply if it is serious about reducing property prices.
taihang
"Firstly, we have interest rates."
Isn't it fair to say that the Government cannot say it "gets it", because it is the same as saying they caused it, and continue to do so?
SpeakFreely
Tom, yes or no. As the rental cost keep going up and people are actually moving into smaller units or delay to move out from parents. rents keep going up will hurt spending as well as push up prices for everything. It will hurt competitiveness. Interest rate is only one element but I think this is the repeat of 1997 before the bubble bursted, everybody only believed in one direction, up.
If you argue is the interest rate pushing the price up. Do you think the interest rate can go further down? No likely, right? So a bottom out means eventfully up. So with a interest rate with a up trend eventually what do u think is the upside of the property price if HK people are rational? Little if you are rational.
Plus I think more people are renting now, what's the implication to you? That's why I say yes or no to you. Plus, globally there are many good opportunity rather than HK. To share with you I made 50% gain in US property in lone year time recently and my rental return is 15% there so why would I want to invest in HK?
By close to 2015 interest rate will rise eventually as this is historically low and hard to repeat unless there is another bubble bursted. US property price will rise as people will start buying to lock in a 30 yr mortgage, and by then hK price will suffer when interest rate inching up. US is the cheapest property price as in many cities house price are only 2 times income!
When you invest, look for the upside....
jerelee
Or does the government want to correct this problem? If you take a peek at the portion of government's annual revenue dependent on property related proceeds (land sales, property taxes, property transaction taxes, not to forget taxes paid by property developers and real estate agents on their income) the answer to this is so obvious that why nobody believes there's a near term cure.
captam
@"The strangest and most worrying thing about it is that the government doesn't seem to understand what's going on."
But they do understand what is going on ! They are, however, still struggling though to find a suitable scapegoat for when the bubble finally bursts.
C.Y Leung needs to prick this bubble pretty quickly though or he will end up taking all the blame for the pain of a correction. If he acts quickly enough, at least he can blame it all on to "Bow-tie" for allowing it to get out of control.
He also needs to educate single-house owners ( who have bought during the past 2 or 3 years) that short term "negative equity" is not really the evil it is portrayed as by rich liberals. So long as the one-house owner still has the roof over his head and isn't selling , he has really lost nothing if prices fall. It's only the property speculators and owners of multiple units who so dread this term (negative equity) because they have overstretched their resources a little too far (& with high debt ratios) and are frightened about that phone call from the bank manager.
 
 
 
 
 

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